Gold Is Broken, But Don't Count It Out

The financial news media is calling it the end of a historic bull market, and top commodities traders are getting out as fast as they can. Dennis Gartman, one of the world's best known commodities traders, said that he had liquidated his long held gold position in his personal investing accounts and he will do the same for his clients' portfolios as soon as he is legally allowed. This is a stunning reversal from a man who has successfully called the movements of gold through much of its historic run.

TUTORIAL: CommoditiesOn Dec. 14 gold did something that is hasn't done in 732 consecutive trading days: It broke through its 200-day moving average. To investors, especially those watching the price action of gold, a break below the 200 day moving average represents the last line of technical defense. For traders who make decisions based on these key support areas, the three most important moving averages, the 20-day, 50-day and 200-day, are now decisively pierced and that is a signal to sell. (For more on the subject of MA's, read Do Adaptive Moving Averages Lead To Better Results.)

Dennis Gartman knows that and that may be why he believes that gold could trade in to the $1400s before finding any buyers willing to take the chance again.

Not Everyone AgreesWith every market prediction, the

contrarian view will often be just as loud. In this case, it starts with the Bespoke Investment Group. It went back in history to look for any precedent that may provide investors with an idea of how bad it will get now that gold has lost its key support.

According to Bespoke, there is no time in history that gold has stayed above its 200-day moving average for 732 days, so the company looked for periods where it managed to do it for 250 or more days. Going back to 1976, Bespoke found six instances.

On average, one month after gold lost its 200-day moving average, it was up 1.55%, after three months it was up an average of 5%, and after a year, gold saw gains of nearly 22%. Out of the six periods, one year later, gold saw negative returns only twice.

What Should I Do?Commodities investors all over the world are asking the same question. When an investment sees such a dramatic fall, traders tend to sell now and think later, but if you're a long-term investor of gold, don't be so quick to bail out. If you have made a significant amount of money by holding a gold ETF, pick a level that would still allow you to hold on to a significant amount of profits. If it dips below that level, sell and wait for a better place to repurchase.

You can also dollar cost average. Sell some of your position now and set levels where you sell more, if gold continues to fall.

The Bottom LineBecause of the impressive bull market in gold, investors and traders get nervous when the metal sees a downturn. Never make decisions on emotion. Use the facts, and in this case, the facts may point to a setup allowing you to make even more money. (For more on this commodity, check out Getting Into The Gold Market)